CRS Reviews Proposed CFPB Regulation on Credit Card Late Fees

The Congressional Research Service ("CRS") reviewed competing arguments on a proposed CFPB regulation on credit card fees. The proposed rule would amend Regulation Z, which implements the Truth in Lending Act.

In an "Insight" analysis, the CRS stated that the goal of the proposed amendments is to lower the credit card late fee safe harbor from $30 to $8, with no adjustment for inflation. The proposal is part of the President's Competition Council initiative to limit "junk fees" in consumer financial markets. "Junk fees" refers to late fees, overdraft fees, out-of-network ATM fees and inactivity fees.

The CRS highlighted CFPB assertions and industry rebuttals to those assertions. These include:

• The CFPB estimates that the proposed rule would reduce credit card late fees by about 75% for consumers. The lending industry counters that the rule would increase costs on credit card issuers and potentially harm consumers who pay on time.
• The CFPB argued that current late fees collected are not "reasonable and proportional," because credit card issuers generate more revenue from their late fees than their actual cost of late payments; the lending industry counters that "lowering late fees would increase costs on credit card issuers, causing them to reduce credit access and increase interest rates, particularly for subprime consumers."
• The CFPB asserts that when consumers are shopping for credit cards, they may not examine late fees, due to the fact that such fees are incurred on the "back-end"; critics argue that late fees promote repayment of credit cards, and lowering late fees may cause the cost of credit to increase, potentially harming consumers who pay on time."
• The CFPB asserts that the impact of lower fees on consumers is likely to be "mixed" as some consumers incur more late fees if they know the fee is lower, but that other consumers will be able to pay down balances more quickly if they are not subject to high late fees. Critics argue that the "proposal ignores the deterrence effect of late fees and fails to recognize the competitive credit card market."